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June 10, 2024 | Enjoy The Moment
Steve Saretsky
Happy Monday morning!
As widely anticipated, the Bank of Canada slashed rates this past week, cutting by 25bps. The move was celebrated across the nation, not just by Realtors and mortagage brokers but provincial leaders in BC & Ontario.
The economy is struggling so much so that it warrants a rate cut, and this is cause for celebration. It’s a strange concept but one that makes sense when you consider the entire country has gorged on debt over the past decade. Even the Bank of Canada was celebrating. “Let’s enjoy the moment”, noted Tiff Macklem in his presser.
Every Realtor is turning to TikTok to promote the end of the housing bear market, as if 25bps is really going to move the needle. However, sentiment is a powerful driver in the Canadian housing market and if enough people believe it, perhaps it will become self-fulfilling?
It’s true sentiment will likely improve, and sales will likely pick up. Although they will be picking up from a very low base. Home sales in the month of May were incredibly weak. In fact, they were the lowest on record in Greater Vancouver & The GTA (outside of May 2020) since the year 2000. That’s pretty low considering we’ve added 10 million people to this country since then.
So anyways, sales are going to pick up. The bottom is near. Yet the math really hasn’t changed. The lowest variable rate mortgage today now sits at 5.75%, down from 6% thanks to the hard work of Tiff this past week. Markets are pricing in another 50bps of cuts by the end of this year. If they’re right that will bring variable rate mortgages back to 5%, which is exactly where fixed rate mortgages are right now!
In other words, the bond market is forward looking and has already priced in most of these cuts. That suggests Canadians could still be looking at mortgages near 5% in six months time. If that’s the case there will be a lot of disappointed borrowers, Realtors, mortgage brokers, developers and Premiers alike!
The Canadian economy is already in a per capita recession but the economic data will need to get even worse before fixed rates can move lower. Unfortunately a stubborn labour market in the US is keeping yields elevated up North.
US Nonfarm payrolls increased by 272,000 jobs last month, far surpassing expectations, pushing bond yields higher across the board, and undoing much of the goodwill the Bank of Canada provided just days earlier.
Again, the unfortunate reality is the math really has not changed. Interest rates surged by 475bps over the past two years. It took a while for those rates to filter through but they are finally doing damage. Cutting rates by 25 or 50bps isn’t going to change the equation for a household behind on their mortgage, a developer on the brink of insolvency, or a condo investor that is deeply negative cash flow. History suggests delinquencies actually increase after the first rate cut.
Furthermore, for the housing market to stabilize you will need to get investors back in the market, considering how much of a roll they’ve played on the demand side over the past decade, not just in the resale market but the pre-sale market as well. The math for an investor still doesn’t pencil today, even with a rate cut or two. So either condo prices and interest rates need to come down further, or rents need to keep growing, and perhaps a combination of the above.
It seems logical to conclude the condo market should remain well supplied, as investor demand remains tepid and units under construction begin to complete. If there was one chart to summarize the whole situation here it is.
The Bank of Canada slashed rates to zero, fuelled a speculative frenzy, and investors piled in, stoking a wave of new housing construction that is set to complete in a higher rate environment where prices are already falling. Some would call it a classic real estate cycle.
The boom sows the seeds for the bust, and the bust sows the seeds for the next boom.
Enjoy the moment, or so i’m told.
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Steve Saretsky June 10th, 2024
Posted In: Steve Saretsky Blog